Derivatives Implementation Group

Statement 133 Implementation Issue No. F1

QUESTION

Can an entity use different stratification criteria for the impairment test for servicing assets subsequently measured using the amortization method permitted by FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (as amended by Statement 156), and for the purposes of grouping similar assets to be designated as a hedged portfolio in a fair value hedge under Statement 133?

RESPONSE

Yes. An entity may use different stratification criteria for the purposes of Statement 140, as amended by Statement 156, impairment testing and for the purposes of grouping similar assets to be designated as a hedged portfolio in a fair value hedge under Statement 133. An entity is not required to change the stratification criteria used for the purposes of impairment testing under Statement 140 as a result of using different stratification criteria for the purposes of grouping similar assets to be designated as a hedged portfolio in a fair value hedge. However, upon adoption of Statement 133, an entity is permitted to restratify its servicing assets pursuant to paragraph 63(f) of Statement 140 such that the risk strata specified for Statement 133 fair value hedging purposes would also be used for Statement 140 impairment testing purposes.

In order to qualify as a portfolio of similar assets that may be designated as a hedged item in a fair value hedge under Statement 133, servicing assets may be grouped using risk strata that meet the criteria in paragraph 21(a). Specifically, paragraph 21(a) requires that if the hedged item in a fair value hedge is a portfolio of similar assets, such as a portfolio of existing mortgage servicing assets, the individual assets must share the risk exposure for which they are designated as being hedged. Also, the change in fair value attributable to the hedged risk for each individual item in the hedged portfolio must be expected to respond in a generally proportionate manner to the overall change in fair value of the aggregate portfolio attributable to the hedged risk. Footnote 9 to paragraph 21(a)(1) of the Statement states:

Mortgage bankers and other servicers of financial assets that designate a hedged portfolio by aggregating servicing rights within one or more risk strata used under paragraph 63(f) of Statement 140 would not necessarily comply with the requirement in this paragraph for portfolios of similar assets. The risk strata under paragraph 63)f) of Statement 140 can be based on any predominant risk characteristic, including date of origination or geographic location.

Because the existing risk strata used for Statement 140 impairment testing may not be sufficient to satisfy the requirements of paragraph 21 of Statement 133, paragraph 56 permits restratification of servicing assets under Statement 140 for fair value hedging purposes upon the adoption of Statement 133. Paragraph 56 states, “...mortgage bankers and other servicers of financial assets may choose to restratify their servicing rights pursuant to paragraph 63(f) of Statement 140 in a manner that would enable individual strata to comply with the requirements of this Statement regarding what constitutes ‘a portfolio of similar assets.’”

If an entity chooses not to restratify servicing assets for Statement 140 impairment testing consistent with any restratification done for compliance with Statement 133 hedging criteria, the entity would be required to record any adjustments resulting from a fair value hedge to the risk strata used for impairment testing under paragraph 63(f) of Statement 140.

The above response has been authored by the FASB staff and represents the staff's views, although the Board has discussed the above response at a public meeting and chosen not to object to dissemination of that response. Official positions of the FASB are determined only after extensive due process and deliberation.